*The main reasons why buying Cryptocurrencies now will never make you a millionaire*
WARNING! This blog post contains information that you may not want to hear. Once again, the cryptocurrency news is flooding across social media with talks of the “next bull run” starting again and Bitcoin and XRP pushing back above $10k and $0.30. Lots of “investors” are now going back to shouting from the roof tops about their cryptocurrency holdings and how they will stand to make millions of dollars if cryptocurrency prices continue to climb to their expected values.
However, I am a firm believer of keeping my feet on the ground and saying what I see. This is even more important when trading the financial markets because you can only trade based on what you see and what you know.
Let’s start this blog with a price chart.
“Use your brain” – CB 2020
Just using common sense and a bit of hindsight, it was clear to see that the 2017 bull run that took bitcoin from $2000 per coin up to almost $20,000 was NOT SUSTAINABLE. Any asset that gains in value by over 1500% in less 6 months is destined to see a correction…
History has a habit of repeating itself, financial market bubbles will form and they will burst. It is why technical traders use chart patterns and technical indicators and support/resistance zones when trading the financial markets. It is because patterns and price action tends to repeat itself over and over again as time goes on.
Why did the prices of cryptocurrency gain so much in 2017?
Speculation. The prices were driven up by almost pure speculation. Social media and technology is a very powerful tool and the Internet was flooded with “crypto fever” back in 2017. The young, the old, the rich and the poor were all talking about cryptocurrency and the possibilities for endless wealth.
Although cryptocurrency and blockchain is new technology and a new financial market, the price of these financial instruments is governed by the exact same laws of economics as the price of baked beans and ball point pens which is supply and demand.
The graph above shows the effect an increase in demand and/or supply on price and quantity. If demand increases, price increases. Global demand for cryptocurrency increased dramatically through the second half of 2017 and this pushed price up to highs never seen before.
This was caused almost entirely by speculation. The general public believing that these currencies are going to be the future, replace FIAT currencies all together and that they are worth double, triple or 10 times more than the current value. 90% of these buyers know/knew very little about the current uses of the cryptocurrencies they were buying and the underlying technology.
Important! I do not intend spend all of this blog post criticising bitcoin or XRP or cryptocurrency and blockchain in general because I do appreciate the blockchain technology that is behind the cryptocurrency movements and the ability for super fast payment networks. This can only be good news for the global financial systems.
My main issue with the cryptocurrency fanbase and the constant marketing on social media is that no one seems to discuss any of the other drawbacks of their beliefs in the future. There are some clear and obvious barriers to overcome before the main cryptocurrencies have any chance of making new all time highs in price and catapulting the average cryptocurrency investor in to millionaire status.
Currently, new bitcoins are being mined at the rate of around 1800 new bitcoins per day. Therefore the supply of bitcoin is increasing and according to the natural laws of supply and demand, this will decrease price. This is exactly like the process of quantitive easing used by governments whereby new currency is produced (printed) to control inflation and other fiscal measures.
The supply of bitcoins will continue to increase until the remaining 2.8m bitcoins (approximation) are mined and added to circulation. Currently only 87% Of bitcoins have been issued in to circulation. The total number of bitcoins that can ever exist is 21 million but until this point, supply is due to increase at a steady rate and that will always have an effect on price.
Even more shocking is XRP (Ripple) which has a total supply of 100 billion coins! Only approximately 41 billion of these are in circulation which means that the current amount of coins in circulation can increase by over 140% before the supply cap is reached.
This is probably the biggest obstacle for cryptocurrencies ever gaining a sustained level of growth in value. Speculation can only carry an asset so far before buyers being to take profits and realise their gains are some what superficial. For any asset to have a long term, sustained increase in price it must have uses and a value that matches the cost.
The biggest cause for the recent surges in the price of cryptocurrencies is the constant stream of rumours associated with the potential usage of cryptocurrencies in the banking, finance and technology industries. This has always been the end goal for crypto believers and buyers and this is where the problem lies.
Big banks and tech companies wont use Bitcoin, XRP or any of the other existing cryptocurrencies!
These businesses are interested in the blockchain technology and benefits that come from it. They are not interested in the specific cryptocurrencies themselves. Therefore they can create their own cryptocurrencies to run on the blockchain technology and get the exact same benefits without the need to deal with highly volatile, heavily traded and speculated coins like Bitcoin, XRP and Ether.
This has already been proven to be the case with examples from Facebook and JP Morgan. Both of these companies have already created or are working on creating their own Cryptocurrencies. News articles showing this are below.
As quoted (and highlighted) in the second article, JP Morgan sees potential in using digital coins but they are not interested in using existing cryptocurrencies. They are interested in using the technology behind cryptocurrency and have the ability to create their own coins.
This will be the same with all large companies within any industry. They will choose to create their own cryptocurrencies to benefit from the underlying technology of blockchain because it easy, controllable and more stable than an existing heavily traded cryptocurrency that is surrounding by speculation and controversy.
The opportunity cost of any investment is often overlooked by many retail investors and traders but I believe it is very important when evaluating the potential returns of a new investment or the performance of an existing investment.
Opportunity cost – “The loss of other alternatives when one alternative is chosen”
Let’s assume you invested $5000 in Gold Bullion and it increased in value by 50% over 5 years. You now have $7500 worth of Gold and a $2500 return on your investment. However, whilst you had $5000 tied up in Gold Bullion, the stock market had returned 8% per year (40% before compounding) and that is your opportunity cost.
This is what hedge funds and professional investors call Alpha returns and it is a good measure for the opportunity cost of actively investing in assets versus the overall performance of the stock market. Your performance measured as Alpha tells you whether your efforts of actively picking stocks/investments was worth it by benchmarking it against your potential returns for simply buying and holding an investment in the stock market.
The chart above shows the performance of XRPUSD (ripple) vs the performance of the S&P500 index over the past 32 months. Ideally, when comparing the performance of two financial instruments you want to compare over as long of a time period as possible so for the benefit of this analysis, I will use the 2013 launch price of XRPUSD which was $0.01 per coin.
Let’s look at the key figures.
|Instrument||4th August 2013 Price||1st February 2020 Price||Total Gain%|
*Market open price on 5th August 2013
The table and charts above show the performance of XRP vs the stock market (represented using the S&P500). From August 2013 through to the February this year, cryptocurrency has outperformed the stock market by a huge margin making it a brilliant investment…. if you had purchased when XXRP first went live at $0.01.
If you would have invested in XRPUSD when it first traded on an exchange in 2013 then you would have returned over 2400%. Even with this huge level or return and if you had invested in XRP at the very beginning at it’s lowest price, there is still a very slim chance that you are a millionaire.
Because you would have needed to purchase over 4.1 million XRP coins at a cost of $41,404.44 at a time when cryptocurrency was a complete unknown. And remember, this is a near best case scenario assuming you are still holding on to your XRP coins.
The peak of the previous bull run (shown by the spike on the chart above) saw price reach nearly $3.30 per coin before price dropped off back down to the current price of $0.28 and lower.
Even if you were one of the very first adopter of the XRP cryptocurrency and bought at $0.01 per coin and sold at the very peak of the bull run in January 2018 when XRP was $3.30 per coin, you would have still needed to be holding more than 357,000 coins. This would have cost you more than $3,570 back when cryptocurrency and blockchain technology was untested and new to the world.
QUESTION! Did you sell your cryptocurrency investments at the all time highs of late 2017/2018?
I bet the majority of you answer no. And that is because 99% of the cryptocurrency population thought price was going to keep on climbing.
According to research in late 2018, the average cryptocurrency investor held $10,000 worth of coins. This was around the time of all time highs where XRP was trading above $3 per coin and bitcoin was around $19k.
This means the average investor would have been holding 0.50 Bitcoin or 3,333 XRP coins. The average cryptocurrency investor (assuming no further acquisitions) would need to see the price of Bitcoin reach $500,000 per coin or XRP reach $300 per coin to become a “crypto millionaire”.
From todays price levels this would represent a gain of nearly 5200% for Bitcoin and 110,350% for XRP. Do you really believe that is possible?
XRP vs the stock market.
The following chart and table shows XRPUSD vs the stock market price for the last 3 years. I will now show you the comparable performance of each investment if you would have bought XRPUSD or the S&P500 index at the beginning of each quarter.
I think you might find the above results quite eye opening. As you can see, the table above shows that from the 3rd quarter of 2017, investments made in the stock market out performed investments in the XRP cryptocurrency 10 out of 11 data points shown above.
In simple terms… from before the big bull run of 2017, it doesn’t matter when you bought in to the XRP cryptocurrency, the stock market has performed better – by a big margin.
And that is your opportunity cost!
If this trend continues for another 10 years before the price of cryptocurrencies manages to get back to its previous all time high prices then the potential returns are diminished because whilst you have been sat waiting for “crypto to go to the moon”, the boring stock market has been slowly ticking along and returning consistent profits.
If it takes 10 years for your cryptocurrency to increase in value by 2x (current price to of bitcoin from $9600 to previous highs of almost $20,000) then you need to take in to account that a well balanced stock market portfolio, compounded annually will perform the same, if not much better.
Rule number 1… never leave a cinema until the lights come on!
The title of this blog post is supposed to be shocking because I want it to generate discussions and for it to be shared across the internet. However, it is a little misleading because there is always a possibility of becoming a millionaire from trading cryptocurrencies.
Firstly, although this is HIGHLY unlikely, the value of bitcoin, XRP, other cryptocurrencies could increase by 20,000% in the future and make your current holdings of $5000/$10,000 worth over $1m.
It is also important to take notice that the cryptocurrency markets are now a fully functioning financial market exactly like the FX, Commodity and stock markets. There are buyers and sellers, the markets trade via exchanges and are derived from assets.
Therefore you can theoretically trade the cryptocurrency markets exactly like you would trade these other finical markets that have existed for hundreds of years. Consistently trading the cryptocurrency financial markets, across multiple timeframes and compounding returns over the course of 10-15 years could make you a millionaire much like successfully trading the other markets has the potential to make you a millionaire.
However, it is certainly almost IMPOSSIBLE to do so by buying $10,000 of an asset and holding on to it waiting for it to gain in value by an extraordinary and unsustainable percentage. Once again, common sense will tell you this is not likely.
The table above shows a much more realistic way of becoming a millionaire whilst trading the financial markets. The first thing you will notice is that the starting capital is 5x that of the average current personal holdings of cryptocurrency. If you are wanting to trade the financial markets and have a good chance of making a significant amount of wealth then you need to be realsitic with your returns on investment.
A consistent return of 30% per annum from actively trading the financial markets and a starting capital of $50,000 will theoretically make you a millionaire after 12 years of compounding returns annually. This still represents a total return on investment of over 2300% which is extremely good (and potentially unlikely for a lot of new traders).
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.